Most salesmen and many trainers tell you this: “When you are in the Accumulation phase you should do a SIP and accumulate money, and when you are in the Distribution Phase you should do a SWP (Systematic Withdrawal Plan)”

This is only partially correct.

When you are in the accumulation phase a fall in the NAV is good news – it means you accumulate more units. Over a long term (assuming that the market has gone North as we all like to believe) you will have more units at a higher NAV.

However, when in retirement  a fall can hurt badly. During a weak market if you withdraw MORE units the amount of time it will take to recover goes up dramatically. So what can one do when the markets are down? Stop withdrawing? If you stop withdrawing, how will you be able to meet your expenses? The damage that you can do to your portfolio by drawing in a falling market can be catastrophic. The problem is not enough may be left for the next boom!

Imagine a 20% fall in the value of the portfolio – and you needing to withdraw a little more than usual!! This will create a 30% impact on your portfolio – and that is difficult to take emotionally too.

So what is important in a distribution phase? the sequence of returns – if the first few years are brilliant, then the portfolio gets strong enough. However if the first few years are bad, and there is withdrawal too, the portfolio has no strength to recover. So it is necessary to create separate boxes. One in debt funds (a combination here too) from where you withdraw for the next 5 years. Then a balanced fund into which you can dip into in case of an emergency….and the third a box of direct and pure equity. The equity and the balanced funds keep growing for 5-20 years..and one need not worry about the day to day fluctuations.

After 3 years suppose the equity market comes out with a 40% block buster year for equities, sell some equity funds and put that money into the debt box. How much? Say another 5 years expenses….

Like I said on a face book page…every complex question has a simple, but wrong answer!!

Similarly handling volatility is complex…learn to understand…and do not expect  easy simple and wrong answers!

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  1. Great Idea. Wonder why I didn’t think about it.

    I did the mistake of doing SWP from one fund to do SIP to another one from the same fund house a few years ago and learnt from the mistake of seeing my returns dipping in a falling market.

  2. SWP can be from a liquid fund or debt fund.
    Parking money in debt fund for 5 years will also be helping tax. After 3 years, the indexation benefit is available.

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